And finally....

Some late breaking news out of Lisbon... the CDS-PP party (the junior coalition partners) have just announced that no more ministers will resign (following rumours this morning that the agriculture and social security ministers might quit).

Instead, CDS-PP say they hope to reach a deal to preserve the government. This follows the party's meeting to discuss the way forward, and may mean Pedro Passos Coelho's position is strengthening....

Here's the news flashes from Reuters:

19:04 PORTUGAL'S CDS-PP PARTY SAYS NO MORE MINISTERS WILL RESIGN FROM GOVT

19:05 PORTUGAL CDS-PP PARTY SAYS TO MEET WITH GOVT COALITION PARTY TO AIM TO PRESERVE GOVERNMENT

I am confident that we will be able to surpass this difficulty... I hope this internal crisis can be overcome very quickly.

Coelho was speaking as his junior coalition partners held talks on whether to withdraw their support, which could trigger a general election. Local media reported that the CDS-PP party had not taken a final decision, but were prepared to 'renegotiate' their relationship with Passos Coelho (details at 6.10pm).

The turmoil in Portugal hit the country's bonds hard, driving the yield on 10-year bonds over 8% at one stage in a sign of faltering confidence in its €78bn bailout programme. The yields slid back to 7.5% tonight, up from 6.5% on Tuesday.

Portugal's president is due to hold talks with key party leaders, including the PM, tomorrow in an attempt to hammer out a deal.

Early close on Wall Street, ahead of the Independence Day celebrations tomorrow. Traders seem to have shrugged off the drama in the eurozone, concentrating on today's better-than-expected private sector jobs data (see 1.40pm) and slightly weaker service sector growth.

Via Sky's Ed Conway, a graph showing how far Portugal's economic output has fallen since the crisis began. The downturn has been particularly severe since it entered its bailout programme, and agreed to make tough spending cuts and tax rises:

Portuguese PM: We can overcome the crisis

Finally, political developments, with Portugal's prime minister insisting that he can remain in power.

Speaking in Berlin, where he was attending the EU summit on youth unemployment, Pedro Passos Coelho reiterated that he had no plans to resign.

Passos Coelho told reporters:

I am confident that we will be able to surpass this difficulty... I hope this internal crisis can be overcome very quickly.

The PM added that all parties in Portugal have an obligation to maintain political stability.

As this photo shows, chancellor Merkel chatted to Passos Coelho during the photoshoot -- and appeared to be offering warm wishes at this difficult time.

Angela Merkel and Pedro Passos Coelho speaking after they pose for a family picture with the head of states and ministers after today's conference on promoting youth employment. Photograph: JOHANNES EISELE/AFP/Getty Images

Market update

With no fresh news from Lisbon this afternoon, the financial markets continue to post heavy losses. The FTSE 100 is down 95 points at 6208, a fall of 1.5%, with 30 minutes of the trading day to go.

Portugal's government bonds have recovered a little, though, but are still down sharply. This has pushed up the yield on its 10-year bonds to 7.5%, from 6.5% overnight. That's still deep in the 'danger zone', where borrowing costs aren't sustainable.

CMC Markets' Michael Hewson commented:

The prospects for further unrest in Egypt appear to have increased with talk that the Egyptian army is set to step in, and President Mursi refuses to step down, while the re-emergence of the European debt crisis, from its previously dormant state has seen the Portuguese government start to come apart at the seams as austerity fatigue pulls at the political fabric of the bailed out country.

The selloff in Portuguese bonds has seen yields shoot up by over 100 basis points as the political uncertainty throws into doubt the continuation of the current austerity package and the credibility of the current government.

Buffeted by all of this uncertainty we’ve seen Europe’s markets trade lower throughout the day with the biggest fallers being mining stocks and banks.

Portugal crisis: what the analysts say

City analyts are divided over the chances of the Portuguese prime minister, Pedro Passos Coelho, holding his government together in the face of today's crisis (see 1.20pm for a round-up of today's developments)

Just when you thought it might be over, with summer around the corner, euro zone debt crisis bares its ugly teeth: http://t.co/Y0u6IPQ3cK

Holger Schmieding of Berenberg Bank said Portugal was "the key event risk to watch" in the eurozone, but was optimistic that its European partners could cut it some slack:

Some tweaking of the Portuguese program should be possible over time, helping Portugal to stay the course whatever the precise outcome of the political crisis.

We remain fundamentally optimistic, especially as the positive results of reforms are starting to show up in the economic data.

Mujtaba Rahman of Eurasia Group also believes early elections are likely, and that could mean Portugal needs more financial help:

While the big question regarding program exit [from its bailout] is still too early to call, it will certainly be complicated by current political developments.

While the government has built significant cash buffers to help them manage 2013 financing needs should market appetite wane, ambiguity over the medium term financing plans is still something of a challenge.

What is clearer is that the less onerous options-such as an extension of the current program with no increase in the financial envelope and/or conditionality, or a simple surveillance post-program follow-up-become less likely the longer and more comprehensive the political mess in Portugal becomes.

While BNP Paribas's Ricard Santos says Portugal could well smudge its eurocrisis copybook, even it it survives the current crisis:

The political process is likely to be bumpy and we could see some brinkmanship over the next few months. Portugal could end with another [international support] programme but may lose its image of being a ‘good student’.

The political crisis in Lisbon shows that the eurozone crisis is not over, says the BBC's Gavin Hewitt, who points out that Portugal has tried its best to meet the demands of its euro partners:

The government in Lisbon has been zealous in following the Brussels/Berlin script by cutting spending and implementing reforms. Portugal has applied some of the fiercest tax rises and budget cuts. In Brussels it was feted as an example of a country doing everything asked of it

It appears, however, that the austerity drive has reached its limits. Even within the government ministers are having doubts. The recession has shown no sign of ending. Unemployment is at 17.6%. There are 932,000 people without jobs. Thousands of graduates are leaving the country. Last week Portugal endured another general strike.

All eyes on the junior coalition partners

In Portugal, the CDS-PP party has been holding a meeting to discuss its next move following the resignation of party leader Paulo Portas last night.

Several scenarios are possible. CDS ministers could resign from the coalition government, but still promise to support it. Or they could withdraw their support altogether, which would strip prime minister Passos Coelho of his majority.

A minority government wouldn't be too unusual for Portugal, but it would run the constant risk of collapse.

Open Europe, the think tank, explains there are three ways that Passos Coalho could be ousted.

Prime Minister Passos Coelho chooses to resign. He said yesterday he does not want to, but could be forced to quit at some point if he loses his majority in parliament.

A no-confidence motion is adopted by the parliament. The key would again be how CDS-PP votes. If the party abstained, Passos Coelho’s party would have enough votes to win. Interestingly, opposition parties in Portugal can only submit one no-confidence motion per parliamentary year. The new parliamentary year starts on 15 September. The Socialist Party, the Communist Party and the Left Bloc have already submitted a joint motion earlier this year, but the Greens have not. This government has already survived four no-confidence votes since it took office in 2011, five may be a step too far.

Passos Coelho requests a vote of confidence and loses it. The Prime Minister could decide to test his majority. However, he would have no chance of winning the vote if CDS-PP votes against him.

US jobs data

While Europe's economy struggles, America's private sector created another 188,000 new jobs last month -- the best performance since Febuary. That's more than the City had expected (160,000 was pencilled in).

Economists reckon it could mean the offical US jobs figure, due on Friday, is better than forecast, as the US economy continues to heal.

Lunchtime catch-up

The political crisis in Portugal dominated today's newspapers in Lisbon. Photograph: PATRICIA DE MELO MOREIRA/AFP/Getty Images

Time for a catch-up on events in Portugal this morning.

•World markets have fallen sharply today and Portuguese government borrowing costs have soared as the political crisis in Lisbon threatens to bring down its government, inflaming the eurozone crisis again.

Investors were shaken by last night's resignation of the Portuguese foreign minister, Paulo Portas, who also leads the junior partner in Portugal's increasingly shaky coalition (see 7.59am for the background).

•The yield, or interest rate, on Portugal's ten-year bonds roared over the 8% mark for the first time in 2013, from under 6.5% at the start of the week. That shows City traders were driving down the value of its bonds as they lost faith in Portugal's ability to exit its bailout next year.

• Amid rumours that two other ministers, both members of Portas's conservative party, might also resign (see 8.38am), the country's president called talks later this week with the main party leaders (12.12pm).

President Anibal Cavaco Silva may manage to broker a deal to hold the government together -- otherwise, there is the risk of early elections.

•While Portuguese bonds slumped, shares also fell across Europe. The UK, French and German stock markets all tumbled around 1.6%, with the FTSE 100 shedding 102 points at 6201.

Portugal's own stock index, the PSI20, plunged by over 5%, led by its banking stocks.

Trader watches the screens at a bank in Lisbon as the Portuguese PSI index tumbled this morning. Photograph: JOSE MANUEL RIBEIRO/Reuters

• Although Portugal's prime minister Pedro Passos Coelho vowed to fight on last night (video at 11.02am), analysts fear that his government's days may be numbered.

David Madden of IG Index warned that the crisis showed unpopularity of European austerity programmes :

Portugal had, until now, succeeded in keeping out of the limelight, quietly getting on with tough reforms while everyone fretted about the bigger worries of Spain and Italy.

Markets don’t like to return to problems they thought had been solved, but the slow-motion disintegration of the Portuguese coalition and the alarming spike in bond yields shows that the medicine of austerity is still a very tough pill to swallow.

The slump in European markets was also due to events in Egypt, where the deadlline set by its army expires this afternoon (live coverage here).

Portas said he was resigning in protest at Passos Coelho's decision to promote Treasury Secretary Maria Luis Albuquerque to become Portugal's new finance minister, succeeding Vitor Gaspar who resigned on Monday night.

• The crisis in Portugal has alarmed top European officials in Brussels. Jose Manuel Barroso, head of the European Commission, issued a statement urging political parties on all sides to act responsibly (details at 11.51am).

But following last night's anti-government protest in Lisbon, many economists warned that the eurozone financial crisis was inflamed again.

...It looks increasingly unlikely that the Greek government will satisfy its Troika of lenders that it is meeting its own bailout targets in time for a meeting of eurozone finance ministers next Monday. That raises the chance that Athens' next aid tranche, worth €8.1bn, might only be dolled out in stages. (see 11.42am)

• We've also had mediocre economic data from the eurozone private sector (9.39am)

Portuguese president to hold crisis talks

Portugal's president is taking steps to address the political crisis gripping Lisbon, and spooking the world's financial markets (see 10.11am).

Amid rumours this morning that two more ministers could resign soon, president Anibal Cavaco Silva will meet with the leader of the main opposition Socialist party later today.

He's then planning to told talks with embattled prime minister Pedro Passos Coelho on Thursday, followed by other parties (presumably including CDS-PP, whose leader resigned as foreign minister last night to precipate the crisis).

Barroso calls on Portugal's politicians to stem the crisis

Jose Manuel Barroso, president of the European Commission, has issued a statement urging Portugal's political leaders to show a 'great sense of responsibility'.

Barroso said he was watching events unfold in Portugal "with very serious concern" following the resignation of its foreign minister last night, and its finance minister on Monday.

Here's Barroso's full statement:

The European Commission and I personally are following the political crisis in Portugal with very serious concern.

The initial reaction of the markets shows the obvious risk that the financial credibility recently built up by Portugal could be jeopardized by the current political instability. If this happens it would be especially damaging for the Portuguese people, particularly as there were already preliminary signs of economic recovery.

This delicate situation requires a great sense of responsibility from all political forces and leaders.

The political situation should be clarified as soon as possible.

We trust that Portuguese democracy will deliver a solution ensuring that the sacrifices the Portuguese people have made until now will not have been in vain.

Regarding those 'preliminary signs of economic recovery' - the latest GDP data showed that Portugal's economy shrank by -0.4% in the first three months of this year, and was 4% smaller than a year ago.

King also points out that the political instability in Portugal shows the flaws within the European Central Bank's bond-buying programme (the Outright Monetary Transactions scheme). Countries can apply to the OMT if they agree to meet tough conditions on economic reforms -- but how can they persuade the ECB that they'll stick to them?

Key event

And here's the details of Jeroen Dijsselbloem's comments on Portugal this morning, from Reuters:

Eurogroup chair Jeroen Dijsselbloem said on Wednesday he expected the situation in Portugal to stabilise and for the country to remain committed to the terms of its bailout."The situation in Portugal is worrying,"

Dijsselbloem told a Dutch parliamentary committee when questioned about the latest crises in the euro zone.

"I assume the political situation in Portugal will stabilise and that Portugal will stay committed to the undertakings that are part of its programme."

As Eurogroup chief, Dijsselbloem will also chair next Monday's meeting when eurozone finance ministers will consider whether Greece is meeting the terms of its bailout package (of which more shortly....).

Retail sales show Portuguese malaise

The latest eurozone retail sales, just released, include a reminder of how much damage has been caused to the Portuguese economy since its austerity programme began.

On an annual basis, Portugal's customers spent 3.6% less on retail goods than a year ago -- with only Spain (-6.3%) and Romania (-4.4%) suffering more.

But the data, from Eurostat, did also provide some hope. Eurozone retail sales rose for the first time in four months in May, by 1% – that's a bigger jump than expected. On an annual basis, though, sales were 1.5% lower.

Portuguese stocks down almost 7%. A close at these levels would mark the biggest slump since Lehman.

• FTSE 100: down 95 points at 6208, - 1.5%

• German DAX: down 146 points at 7764, -1.8%

* French CAC: down 62 points at 1.67%

• Spanish IBEX: down 222 points at 7664, - 2.8%

• Italian FTSE MIB: down 289 points at 15076, -1.88%

Matt Basi, head of UK sales trading at CMC Markets, says the Portuguese crisis is a real worry, but not the only one:

Concerns over instability in Egypt are well founded given the swell of unrest in recent weeks, and with political in-fighting rearing its ugly head in Portugal the market breathed a collective sigh of disappointment as once more we’re forced to contemplate the impact of political incompetence on asset prices.

Here's the highlights: (anything above 50=growth)

Chris Williamson, chief economist at Markit, believes the data shows the eurozone recession continued in the last three months, but should finally end before 2014.

The sub-50 PMI reading for June indicates that the euro area recession has extended into a record seventh consecutive quarter. The survey is broadly consistent with GDP falling by 0.2% in the second quarter, similar to the decline seen in the first three months of the year.

However, there is good reason to believe that the region is stabilizing and on course to return to growth during the second half of the year.

Photos: last nights protests

The crisis in Portugal was sparked by the resignation, on Monday afternoon, of finance minister Vitor Gaspar - who appeared to have lost faith in the austerity programme he'd help create and implement.

Demonstrators took to the streets of Lisbon last night to show their anger, carrying banners and chanting for prime minister Passos Coelho to step down.

Portuguese 10-year bond yields hit 7%

Good morning, and welcome to our rolling coverage of events across the eurozone, the financial markets and the global economy.

Portugal has been dragged deeper into the eurozone crisis after its government was rocked by its second resignation last night.

Portuguese government debt is falling sharply in early trading, as investors react to the news that prime minister Pedro Passos Coelho is fighting to hold his administration together after his foreign minister dramatically quit.

Last night Passos Coelho refused to resign, telling the country that he would deliver a "rapid return to stability", and pledging:

But the resignation of Paulo Portas, the leader of the conservative Popular Party which is the junior partner in the coalition government, could have major political and economic ramifications.

Portas's resignation has raised new questions on whether Portugal can push on with its unpopular programme of spending cuts and tax rises. With austerity fagitue rife in Portugal, can Passos Coelho hold things together?

The early reaction from the City isn't encouraging: Portuguese sovereign debt has slumped in value this morning. This has driven the yield (or interest rate) on its 10-year bonds up sharply. It's now above the 7% mark, from less than 6.5% at the start of the week.

That 7% mark is significant. In the history of the eurozone crisis, countries have looked in peril once their borrowing costs have moved above that level (although both Spain and Italy looked into the abyss and survived without a bailout).

The market is saying that Portugal's chances of escaping its own bailout programme are falling....

It's going to be a busy day, I think. Away from Portugal, the Troika continue their visit to Greece, and there's a swathe of economic data due - this time covering the world's service sectors. Plus Eurozone retail sales later this morning.